Has rising inequality been bad for the poor?

December 14, 2010

Income inequality has risen sharply in the United States and some other affluent countries since late 1970s, with much of the increase consisting of growing separation between the top 1% and the rest of the population.

Has this been bad for the incomes of the poor?

In a relative sense, the answer is yes, at least in the United States. According to the best available U.S. data, from the Congressional Budget Office, the share of income going to households at the bottom has decreased.

What about in an absolute sense? Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality. (For more detail, see my piece in the November-December issue of Challenge.)

In some countries with little or no rise in income inequality, such as Sweden, government transfers increased and so did the incomes of poor households. In others, such as Germany, transfers and the incomes of low-end households did not increase.

Among nations with sharp increases in top-heavy inequality, we observe a similar disjunction. Here the U.S. and the U.K. offer an especially revealing contrast. The top 1%’s income share soared in both countries, and through the mid-1990s poor households made little progress, as the following chart shows. But over the next decade low-end American households advanced only slightly, whereas their British counterparts experienced sizable gains. The New Labour governments under Tony Blair and Gordon Brown increased benefits and/or reduced taxes for low earners, single parents, and pensioners. As Jane Waldfogel documents in her book Britain’s War on Poverty, these were big policy shifts, even if not always high-profile ones. They produced a significant rise in the real disposable incomes of poor households.

Rising income inequality has a number of potential consequences — some of them, perhaps many, undesirable. Its apparent lack of impact on the absolute incomes of the poor over the past generation ought not lead us to overlook this. Still, it is noteworthy that some affluent countries have managed to engineer income growth for low-end households despite a significant top-heavy rise in inequality. For American policy makers, that might serve as welcome inspiration.

5 Responses to “Has rising inequality been bad for the poor?”

  1. Other Peter T Says:

    Aside from the effects of relative inequality, there are other consequences to moving from a situation where lower end incomes derive from work to one where they derive from transfers. One – most obvious in the UK – is that the state (or other transfer provider) can lean on the recipient in all sorts of ways – from school attendance to what job you take. And this pressure will be copied by employers, who can now make the employee jump through more hoops – often pointless ones designed simply to reinforce dependence (see, eg, Barbara Ehrenreich’s Nickeled and Dimed for the current US). And what starts in these spheres will end up expressed in politics.

  2. Farrar Says:

    “Still, it is noteworthy that some affluent countries have managed to engineer income growth for low-end households despite a significant top-heavy rise in inequality. For American policy makers, that might serve as welcome inspiration.”

    Fat chance in present Congress

  3. Craig Says:

    U.S. policy makers seem to have no real inspiration, as it has primarily been replaced with motivation. Corporations and the economic elite have the wherewithall to provide motivation. Low-end households are a liability on the budget balance sheet and a drag on wealth generation, which is a very uninspiring policy fact. Progressives have to find a way to clever-up and convince conservatives that strengthening the bottom will benefit the top economically. That will definitely be a hard sell.

  4. greg Says:

    The poor dependent on transfers are living on borrowed time, certainly in countries running high government deficits. The debt required to maintain their living standards has been rendered public, rather than being private, where it would not have been hidden. In the current political and fiscal climate, this is unsustainable. The poor, and all others dependent on transfer payments are going to take a big hit, should government austerity become a real policy.

    The bottom line is that transfers have hidden a very real decline in the financial well being of the poor, compared to the incresing affluence of the wealthy. The increasing disparity in wealth is much worse than it appears.

    The poor bear the debt. The wealthy profit from it. And the wealthy profit more by increasing the debt more. And the burden on the poor, and increasingly the middle classes, grows ever more onerous.

  5. Mr Econotarian Says:

    Perhaps we should be more concerned about the pre-tax/pre-transfer income of the poor. I’d ague that dropping the minimum wage would reduce the unemployment of the poor, as well as expand affordable daycare for poor single mothers earning above the existing minimum wage who can’t work enough hours because of child care issues (which describes a large portion of US families in poverty).


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